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Break-Even Point

In: Business and Management

Submitted By muscatgirl1
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CVP ANALYSIS

CONTRIBUTION MARGIN RATIO

The contribution margin (CM) ratio is the ratio of contribution margin to total sales:

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If the company has only one product, the CM ratio can also be computed using per unit data:

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The CM ratio shows how the contribution margin will be affected by a given change in total sales.

BREAKEVEN ANALYSIS - EQUATION METHOD

Q = Break-even quantity

Sales = Variable expenses + Fixed expenses + Profits

Q x selling price/unit = (Q x variable expense/unit) + Fixed expenses + Profits

BREAKEVEN ANALYSIS - CONTRIBUTION MARGIN METHOD

Break-even quantity = Fixed Expenses CM/u

To calculate the breakeven point in sales dollars, substitute ratios as a percent of sales for dollars. Or, calculate the breakeven point in units and multiply by the selling price/unit.

MARGIN OF SAFETY

The margin of safety is the excess of budgeted (or actual) sales over the break-even sales. The margin of safety can be expressed either in dollar or percentage form. The formulas are:

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OPERATING LEVERAGE

Operating leverage measures how a given percentage change in sales affects net operating income. It is a measure of volatility in net income caused by high fixed expenses relative to variable expenses.

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Use the income statements for Company X and Y to compute: a. Breakeven point in units and sales dollars. b. Margin of safety. c. Degree of operating leverage. d. The change in net income caused by a 10% increase in sales.

| |Company X |Company Y |
|Sales (5,000 units) |$500,000 |100% |$500,000 |100% |
|Less variable expenses |

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